No place for 1.75% trailer fees?

While the Cummings Report has reignited the debate about fees, it also brings into question whether regulators should cap trailer fees or even ban them

Right there in the Cummings Report’s analysis of how past performance affects fund flows was the startling revelation that some fund companies still pay trailer fees in excess of 1%.

In fact, some go as high as 1.75%, prompting some within the industry to wonder why regulators don’t cap trailers – if not ban them outright. Others, however, see this as more money out of the pockets of advisors already shouldering a heavy regulatory burden.

“A 1.5% trailer is the epitome of what is wrong with financial advice in Canada” wrote Ottawa-based PWL Capital Investment Advisor Ben Felix in an email to WP. “If a fund pays a higher trailing commission than its peers, it becomes a conflict for commission-based advisors, which the Cummings Report implies using fund flow data. No advisor can predict which actively managed funds will do well in the future, and they are only held to a suitability standard, so why not recommend the suitable fund paying the highest trailer?"

So, who pays more than 1%?

According to a recent stat from a large Canadian fund company, only 10% of the 2,700 or so mutual funds in this country do so. But those that do really go to town.

For example, SEI Investments pays 1.75% for their Series D funds. In the case of its Canadian Equity Fund the MER works out to 2.88%, considerably higher than the 2.1% average for Canadian equity funds. By comparison, Fidelity’s True North Series B fund pays a 1% trailer with an MER of 2.29%.

Over the past five years the Fidelity fund delivered annualized returns of 8.12% according to Morningstar compared to 2.6% for the SEI fund. Score one for the Cummings Report.

Who else pays more than 1%? The banks do.

CIBC’s Canadian Equity Fund, Series A, pays a 1.25% trailer with an MER of 2.39%. Its annualized performance over the last five years was 3.95%, better than the SEI fund (1.75% trailer) but 417 basis points less than Fidelity’s True North.

Both of these examples highlight why some believe trailer fees should be capped – if not by regulators then perhaps by the industry itself.

“When it comes to fees, nobody is talking about value – what it is and how it’s delivered,” says Ottawa advisor Bob Roby. “One cannot legislate pricing. Rates, however, can be capped and guidance provided by the firms in question.